Earnings came in light for the IPPs, with an average bottom-line miss of ~5%.

Y/Y growth was a challenge as well, with lower power prices in Spain (NPI) and Alberta (TA, CPX) putting pressure on assets earning in the spot market.

The development cycle was another headwind to growth, with companies like Northland (NPI) more exposed given their focus on larger, more capital intensive projects in comparison to a company like Boralex (BLX).

We dug through conference call transcripts and filings, which had 3 main themes:

1. Power demand growth remains robust, from structural trends like data centers, reshoring, electrification and decarbonization

2. Public vs. private market valuation gap persists, specifically for renewable assets

3. Capital recycling to fund growth, as companies look to focus their portfolio and become less reliant on capital markets

In general, the narrative from management teams was one of recovery, given the string of challenges that have killed sector sentiment in recent years.

Asset recycling is opportunistic for most

With low equity valuations, IPPs continue to tap their own asset base to raise capital for development and reduce leverage, given private markets are willing to pay a fair price.

We’ve seen a number of divestitures from the group recently:

• Innergex (INE): Sold down most of its Texas Portfolio for ~$250M

• Northland (NPI): Sold its 130 MW Mexican solar farm (with more assets up for sale right now)

• Capital Power (CPX): Sold a 49% stake in Quality Wind (BC) and Port Dover/Nanticoke Wind (ON) for ~$330M

• Boralex (BLX): Could sell down hydro assets to help fund growth

For Brookfield Renewable (BEP), asset recycling isn’t opportunistic, it’s core to the business, with $1B of net proceeds from asset sales in 2024. While it frequently gets lumped in with the other IPPs, it shouldn’t, as it operates much more like a private equity shop than a traditional power producer.

Development pipelines are healthy

Despite all the noise around renewable power producers, they’ve performed well over the past decade for the most part, growing EBITDA/sh at a mid-single digit clip on average.

They have plenty of opportunity to continue that growth, supported by a favourable demand backdrop that should support the industry for decades to come. Check the size of these pipelines!

Naturally, these development pipelines take years to yield earning assets and many of the projects never get to the finish line - only those that meet the company’s return thresholds.

That threshold is getting harder to hit, given there are many large private players with big cost of capital advantages. It’s part of the reason we’ve seen so many take-privates in the industry lately.

Investors want gas, companies do too

Given its better fit as a reliable form of baseload power, natural gas power plants have been riding the data center demand wave, allowing gas-heavy names to close a large, persistent discount to the renewable peer group over the past year.

It’s not just hype either, with gas-heavy operators like CPX and TA highlighting strong demand from the market.

Renewable heavy operators are also getting involved, with NPI now leaning in heavily to the new regime by disclosing ~1 GW of new natural gas projects in its development pipeline for the first time.

Valuations are still low despite INE takeout

Despite INE getting taken private at a 60% premium, valuations still haven’t caught up with historical averages.

Investors focused on free cash flow aren’t likely to be salivating over the discount though, with the group average FCF yield well below what’s buyable in other industries.

With points both for and against the IPPs today, we remain of the view that you have to be selective instead of buying the basket.

Northland Power (NPI) remains one of the most interesting names in the space in our view, with two large projects coming online in the next two years, a new CEO, and a rebranding opportunity as the company pivots to natural gas. With a 6% dividend yield that appears sustainable, you get paid to wait for the market to agree.